The  recent  retracement  of  Supermax’s  share  price  –  in  line  with  the selldown  of  the  broad  market  –  has  left  the  stock  with  attractive valuations.  Thus,  we  upgrade  our  call  to  BUY  (from  Neutral)  with unchanged  earnings  forecast  but  a  revised  MYR1.87  TP  (10.7x  FY15F P/E, 10.7% upside). We believe  the rubber glove sector will benefit from favourable macroeconomic conditions going forward.

Cost  pressure  relief.  Unlike  2014,  which  was  beset  with  cost  hikes (+15% electricity and +21% natural gas), we do not foresee significant cost  headwinds  for  2015.  Weaker  demand  and  a  stronger  supply situation  in  the  rubber  market  are  expected  to  persist,  thus  keeping natural latex  prices low. Meanwhile, the current  oil price weakness,  from which nitrile is derived, is expected to keep nitrile prices favourable as well.  Combined,  these  should  help  ease  pressure  on  Supermax’s margins. 

Weaker  MYR exchange rate.  The strength  in the USD/MYR exchange rate  will  benefit  Supermax.  This  is  because  sales  are  denominated  in USD while cost structure is mainly denominated in MYR.  An increase of 3%  in  the  USD/MYR  exchange  rate  could  possibly  raise  earnings  by around 3%.

Re-rating catalyst. Earnings growth ought to be capacity driven. Should Supermax deliver on the execution of its  expansion plans, namely Glove City and Supermax Business Park, we believe that market will re-rate the P/E multiple tagged.

Upgrade  to  BUY.  The  recent  retracement  of  share  prices  during  the broad market selldown has left the stock with attractive valuations. We maintain  our  earnings  forecast  but  revise  our  TP  to  MYR1.87  (from MYR2.16). This is derived from 0.5SD below the  5-year historical mean of 10.7x FY15F P/E, which represents a 10.7% upside. 

Source: RHB